Newater Technology is a Chinese water treatment business that will soon be privatized for $3.65/share.
- Financing will primarily be provided by Yanzhou Coal Mining, a major state-owned enterprise
- Shareholder vote is 7/12. Closing expected in 3Q.
- Merger progress was delayed by a mysterious last-minute competing bid.
Corporate history
Newater was formed in 2012 and operates in China as Jinzheng Eco-Technology (金正环保科技有限). The company raised money privately from insiders and friendly parties in early 2016 at $0.65/share. In August 2017 the company completed an ipo at $5/share (not ADS) through Viewtrade Securities.
The company has reported rapid growth over the past five years:
The Buyout
The merger proxy disclosed that Chairman Li began considering a privatization offer in “late 2019”. probably when the share price fell sharply to $3.00 in late December after the company reported weak 1H19 operating results.
Chairman/CEO Li and CFO Zhang submitted a $3.10/share buyout offer in May 2020 when markets were severely depressed by COVID. In September a definitive agreement was signed at a price of $3.65 with financing to come from Newater’s own company cash.
The proxy explains that discussion on business cooperation with Yanzhou Coal (HKEX listed with market cap over US$10Bn) began in June 2020, but that Yanzhou did not begin considering participation in the buyout until October, after the definitive agreement was signed. In November 2020 Yanzhou agreed to acquire 45% of the privatization vehicle, eliminating most of the potential need to use Newater’s own cash to pay minority shareholders. Yanzhou’s 2020 Annual Report disclosed that a Deputy General Manager was appointed Chairman of Yantai Jinzheng Environmental Technology in January 2021. A recent contract announcement shows that Yanzhou and Jinzheng have begun business cooperation. Yanzhou’s participation in the buyout seems to eliminate most financing and regulatory risk.
On February 22, 2021, one month before the planned March 19 shareholder vote on the merger, Newater’s directors received a letter from Fulcan Capital Partners offering to acquire the company for $4.90/share. The Directors consulted PRC Counsel and rejected the Fulcan proposal based on doubts about its “credibility, feasibility, and legality”. On March 16 Fulcan was granted an injunction in BVI Court blocking Newater from taking any steps to proceed with the merger. On June 17 the injunction was lifted and Newater promptly filed a new proxy and scheduled a July 12 vote.
The merger requires approval from an affirmative majority of outstanding shares. 48.1% of the shares are held by Rollover Shareholders participating in the buyout so the vote will pass even if only 3.6% of remaining shares vote in favor. There is no requirement for a “majority of the minority”.
Risks
- Identity of pre-IPO shareholders aside from insiders is unknown. Shares owned by those investors presumably account for a majority of the post-IP trading volume.
- The IPO was underwritten by Viewtrade Securities, stocks underwritten by Viewtrade have been poor performers
- Newater’s auditor, Malone Bailey, has been associated with several fraudulent and questionable companies.
- Fulcan might be successful in new legal actions to stop the shareholder vote or closing of the merger. Fulcan never made any public disclosures about its offer so it’s hard to guess at its intentions.
- With solid profitability, rapid company and industry growth, and developing cooperation with Yanzhou Coal, Newater appears to be worth significantly more than $3.65/share. If the buyout fails to complete at that price then it will probably be due to significant hidden risks and the fair value of the shares could be as low as zero.
Disclosures and Notes
At the time of publication the author held a long position in Newater. The author does not make any recommendation regarding investment in Newater or any other company. Investors should verify any facts in the article they deem relevant to their own decisions about any investments.
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